Social media's future looks bright, apply sunscreen

Venture capitalists and entrepreneurs try to predict the future of the social-media business. It looks a lot like what we have now.

MOUNTAIN VIEW, Calif.--At an Internet conference here Wednesday, venture capitalists and entrepreneurs tried to predict the future of the social-media business. Guess what? It looks a lot like the Web business model we have now.

Why the prognostication? VCs and executives are all trying to figure out how they can build the next Bebo, a social network that sold to AOL for $850 million . But because those deals are few and far between, especially in a shrinking economy, executives are taking a much more practical stance on the kinds of companies necessary to deliver social-media sites to the next level, or beyond "pokes" and "hugs."

Promising companies are new advertising networks, e-commerce applications, payment systems, and infrastructure providers for social networks, according to executives here at the Dealmaker Forum 2008.

It sounds like a rehash of what went into Web 1.0, with a social twist.

Social media is in the spotlight because from a consumer perspective, it's causing a shift in how people spend their time online and how they relate to media. All those involved, from advertisers to entrepreneurs to major media companies, are trying to figure out what it means to their business and how they should take advantage of it. What's more, many social-media companies are still figuring out how to turn a profit.

The definition of social media can vary depending on who you talk to. But in general, the term refers to any media (text, photos, video, etc.) that has a social element built around it on the Web. Examples can range from Flickr for sharing photos, to user-generated encyclopedia Wikipedia, to Muxtape for publishing music playlists, to Facebook for "poking" and staying up on friends.

"It's really an evolution of media from a one-way direction to a highly interactive model, where people are developing relationships around content. That drives engagement...and creates a whole new opportunity for business," Mike Jensen, director of technology group at Credit Suisse, said during a panel discussion at the one-day conference.

That said, later in the panel Jensen likened some of the high-ticket acquisitions in social media to "drunken sailor" behavior. He didn't name deals. But Google, for example, paid $1.6 billion for YouTube and CEO Eric Schmidt said only recently that the company still hasn't figured out how to make money from the video-sharing site.

One opportunity for new business is in e-commerce.

Dave McClure, an angel investor at 500 Hats, believes the future of the business will be in so-called social commerce, or the intersection between online shopping and socializing. Netflix might be an example of early social commerce because it encourages members to recommend movies to friends. But he envisions social commerce going much further.

"Social commerce is where (the business is) headed. Companies that have mined enough social graph data and can combine shopping to it--whoever figures that out, they will be set," McClure said during a panel.

"Social commerce is where (the business is) headed. Companies that have mined enough social graph data and can combine shopping to it--whoever figures that out, they will be set."
--Dave McClure, angel investor, 500 Hats

Early companies in this arena are ThisNext and Kaboodle, which sold to publishing conglomerate Hearst Corp. for a reported $40 million. Kaboodle and ThisNext offer services that connect people with similar shopping tastes, or offer recommendations from that data.

Jason Oberfest, vice president of business development at Myspace, said on a panel that, in the future, he believes a "significant portion" of MySpace's revenue will come from leads generated for online retail sales.

Oberfest added that the industry also needs companies that specialize in payment processing for social networks so that people can more easily purchase real or virtual goods. That business isn't being served by PayPal or other existing players, he said. "It's a big area of need," Oberfest said.

Much of the hype in social media has gone to application makers like Slide and RockYou, which have amassed valuations as high as $500 million. But most of the smaller widget makers aren't going to be lasting companies, according to Charlene Li, a senior analyst at Forrester Research. "You can get viral quickly, but let's track and see how long that app stays around," Li said.

Charlene Li, Forrester Research analyst Forrester Research

Instead, she said, more developers should be working on applications that provide utility to people, rather than just entertainment. For example, spin-offs of Twitter for health care or emergency workers could hold promise, she said. Li even touted Dogster, a social network that helps dog lovers arrange play dates, as a hit in the arena. An executive from the company was in the audience and suggested that the company was for sale.

Sergio Monsalve, a venture capitalist at Norwest and former executive at Photobucket and eBay, said companies like Affinity Labs are also highly valuable. Affinity Labs, which sold to Monster Worldwide in January, builds social networks for specific communities, such as nurses or teachers. Sergio said even though that company isn't a household name, it generates $20 million to $30 million in revenue inside Monster.

Advertising redux

Another major area of innovation--or rehash--is advertising, which is the economic engine of most social-media sites. Thanks to social networks like MySpace and Facebook, companies are armed with much more data on people's habits, preferences, and social behavior. Executives believe that data, if used right, can build the next advertising giant.

"To take Bebo to a billion dollars, you have to automate it...and build a (Google) AdWords for social networking," said Jim Scheinman, entrepreneur in residence at Charles River Ventures and an early employee at Bebo.

Still, social networks have long been challenged to sell their inventory to mainstream advertisers for several reasons. For one, advertisers are squeamish about putting their brands next to a user-generated video of high-school band practice, for example. Another reason is that salespeople from social networks don't speak the same language of metrics that traditional advertisers and agencies speak.

"The promise for this space is that you've got this engaged audience--people spending 20 to 40 minutes talking to each other in a way they haven't before--and if you put these ads in front of them, what do you call it and how do you sell it to agencies?" Scheinman said.

Early companies in this arena include social-ad networks Lookery and SocialMedia Networks.

MySpace is seeing early success for its advertising service called hypertargeting, which lets advertisers reach customers by their behavior on the social network. Oberfest said people are responding more positively to those ads.

Seth Goldstein, founder of SocialMedia Networks, an advertising platform for social networks, said that he envisions an open system from Facebook or MySpace that would allow companies to look at a person's social graph, or collection of their friends. Then the company could extract who is most influential to that individual in areas like travel or movie recommendations.

"If I can select the right person to have influence over you, I can choose that person to send you a message," he said.

Nicolas Kardas, senior product manager at Microsoft's Windows Live Platform group, said despite the forward twist on social media, the business models aren't that different than those of years past. It's just that with social networks, companies know much more about the consumer, and that information delivers the option of a much bigger premium for advertising.

"It's better targeting for advertising. But from a business standpoint, I haven't heard anything new than what I heard before," Kardas said.

That isn't slowing the competition in social networking and media. For that reason, venture capitalists expect more consolidation and buyouts in the market.

"I think big media companies will continue to be aggressive in this area. But in my mind there will be a lot of carnage," Credit Suisse's Jensen said.

 

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